Bond Watch: Bank of England expects four rate cuts in 2025

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.     

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.          

• Invest with ii: How Bonds & Gilts work | What is a Managed ISA? | Buy Bonds

Will interest rates hit 3.5% in 2025?

Today, interest rates in the UK are at 4.75%, with a further cut on the cards at the Bank of England’s 19 December meeting.

With inflation currently at 2.3%, the central bank has to carefully balance cutting rates fast enough to keep the economy moving without stimulating it too much and causing more inflation.

Bank governor Andrew Bailey gave us a clue about his rate-cutting plans this week, telling the Financial Times he expects four interest rates cuts next year if his expectations for the economy come true.

• Benstead on Bonds: are we entering a new inflationary period?
• The biggest bond bets the pros are making

He told the FT that consumer price inflation (CPI) had fallen more rapidly than policymakers expected a year ago.

Cuts could therefore take UK interest rates to 3.5% or 3.75%, depending on what decision is made this month.

If correct, then this could lead to a boost in bond prices, as gilts maturing in under five years currently pay around 4.2%. A lower base rate should bring down yields (a result of rising prices) on shorter-term bonds, assuming the market does not foresee higher inflation as a result of the cuts.

When the Bank of England cut interest rates in November from 5% to 4.75%, it said if inflationary pressures continue to ease then it should be able to keep reducing interest rates gradually.

“But it is vital that we make sure inflation stays low, so we need to be careful not to cut them too quickly or by too much,” it added.

• The highest-yielding money market funds to park your cash in
• Will interest rate cuts reduce returns on money market funds?

There are some concerns that policies from the Labour government, and Trump in America may be inflationary, such as by increasing costs on businesses via the employers’ National Insurance increase.

I discuss the possible political impact here, in my latest column on bond markets.